Undervalued Savills attracts bargain hunters

Profit takers demolished Savills shares, but many think the shares are cheap, reports Graeme Evans.

An impressive start to 2019 for shares in property agent Savills (LSE:SVS) came to an abrupt halt today as familiar worries about the uncertain global outlook dominated sentiment once again.

Despite Savills sticking by expectations for this year,  the FTSE 250 stock fell as much as 10% as CEO Mark Ridley said he expected declines in transaction volumes in a number of markets.

While his ongoing caution is understandable, a 10% rise in full-year revenues to £1.8 billion and 3% improvement in underlying earnings per share to 77.8p for 2018 suggests an impressive degree of resilience in the Savills business model.

The company boasts a well diversified portfolio, with almost two-thirds of its revenues generated overseas. In fact, only 7.5% of the company's turnover came from UK residential last year, with 5.6% coming from UK commercial.

There's also a broad range of operations - from residential and commercial through to property and facilities management and investment management.

This spread contributed to a robust final quarter of 2018, a performance that clearly wrong-footed many investors given that shares had tumbled by a third last year on pessimism towards the UK-listed property sector.

Shares have subsequently rebounded by 32% in the year up to last night, aided by a reassuring trading update in early January and a bout of takeover speculation linking Savills to a possible approach from US-based real estate firm JLL.

Source: TradingView (*) Past performance is not a guide to future performance

The strong performance unwound a little today, although at 885p the stock still offers plenty of upside value according to analysts at Numis Securities and UBS.

Numis analyst Chris Millington pointed out the shares were trading on a price earnings (PE) multiple of 12.3x, based on his new 2019 forecasts. This compares to rivals JLL and CBRE being on 14.6x and 14.2x respectively.

Millington added:

"Against the backdrop of global macro uncertainty, Savills has delivered a good 2018 performance.  These results show the benefit of Savills' diversified business model from geographic and end market perspective."

Numis has a target price of 1,080p, while UBS is at 1,075p based on a 14x PE multiple. It said the current valuation of 12x looked unchallenging given the company's track record. The stock yields more than 3% after the dividend was lifted 3% to 31.2p a share today.

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UBS said the highlights in today's results were the improved performance in North America after underlying profits jumped by 64%, as well as the resilient performance in other regions. Profits in the UK were flat at £76.8 million after revenues rose 6%.

The biggest division of transaction advisory grew revenues by 9% in the year, despite a backdrop of heightened uncertainty in a number of key markets. Savills said the performance demonstrated the importance of having "a breadth of transactional business around the world". 

Underlying profits for the division were down slightly at £81.1 million, whereas the figures for property and facilities management and consultancy both improved sharply.

UK commercial transactional revenues fell 3% amid reduced market activity, particularly in retail, while UK residential overcame Brexit challenges to grow market share with 2% revenues growth.

A poll of 450 high net worth investors in the UK and overseas recently found that 85% of those invested in residential or commercial property had not been put off by current conditions and were looking for new UK investment opportunities.

*Horizontal lines on charts represent levels of previous technical support and resistance.